Registered Investment Advisor – Hampton Roads, Virginia

Is a Government Shutdown a Good Thing?

In the middle of all the media and political hoopla about the government shutting down, people who keep their heads when others are losing theirs may ask the important question about a government shutdown: is it a good thing or a bad thing? Government shutdowns have happened before. In fact, most people many not be aware that from 1976 to 1996 there were 17 shutdowns totaling 110 days. Remember the horrors that were predicted in the run-up to the “Sequester.” With the exception of the news media, almost no-one noticed. From First Trust, we get the following comments:

It looks like House and Senate won’t come to a budget agreement by midnight and, as a result, the federal government is going to partially shut down starting Tuesday morning. Run for the hills? Armageddon: right? Nope!

As we said a few weeks ago, a shutdown is not as scary as it seems. Money still flows into the Treasury Department and money still flows out, for Social Security or to make interest payments on the debt, for example.

The military, border control, food inspections, air traffic, prisons, weather service, and post office, all keep going. And, as long as the Treasury Department has room to continue its “extraordinary measures” or if the debt limit goes up in the meantime, Treasury still pays the debt as it comes due, without missing a beat.

The downside is that if you need a passport or want to get into a national park, you are out of luck. Non-essential services stop and non-essential federal workers get furloughed.

So what happened in those previous shutdowns? The economy kept perking along. Keep in mind, in our country a government shutdown does not shut down the economy. Here is what followed the longest one:

That was the three-week shutdown from mid-December 1995 to early January 1996 under President Clinton. Real GDP grew 2.3% in the year before the shutdown, a 2.9% annual rate in Q4-1995 and then at a 2.6% pace in Q1-1996, despite the shutdown and the East Coast Blizzard, a multiple day massive snowstorm in January that was followed by large floods. The real result of the 1995-96 shutdown was that politicians could no longer hide the fact that government was overspending. And when politicians can’t hide, when the public finally finds out the “Emperor Has No Clothes,” there is a political reaction. In the late 1990s, that reaction slowed government spending relative to GDP dramatically and the US eventually moved into surplus.

Is that likely to happen today? Well, we doubt that we’re headed for a budget surplus, but the predictions of doom are overstated.